The Trump administration’s growing willingness to use access to US dollars as a foreign policy incentive could ultimately undermine one of America’s greatest economic advantages, according to a new analysis from economists at the Peterson Institute for International Economics.
Researchers warned that turning currency swap lines into diplomatic rewards may weaken confidence in the US dollar’s neutrality and encourage foreign governments to seek alternatives. At stake is the dollar’s role as the world’s dominant reserve currency, a position that has helped the United States finance itself cheaply and exert substantial influence over global markets for decades.
The concern comes as President Donald Trump’s second administration appears increasingly open to extending privileged access to dollar liquidity beyond traditional crisis situations.
From emergency tool to diplomatic incentive
Currency swap lines have historically been used sparingly. During periods of market turmoil, such as the 2008 global financial crisis and the early stages of the COVID-19 pandemic, the Federal Reserve provided temporary access to dollars for foreign central banks to stabilise markets and prevent forced sales of US assets.
That approach is now evolving.
The Peterson Institute argues that the administration is treating dollar access as a diplomatic incentive, rewarding countries that maintain favourable relations with Washington. Economists cautioned that this shift could blur the distinction between economic stabilisation and geopolitical bargaining.
The United States operates two separate channels for these arrangements.
The Treasury Department can use its Exchange Stabilization Fund, a portfolio worth nearly $220bn, to support strategic allies. In 2025, Treasury established a $20bn currency support framework for Argentina under President Javier Milei, whose administration faced severe economic pressures and who shares ideological alignment with Trump.
The Federal Reserve, however, occupies a different position. Because it can create dollars when necessary, its capacity to supply liquidity is effectively unlimited, making its independence particularly important.
The Fed currently maintains permanent currency swap arrangements with only five central banks: the Bank of Canada, the Bank of Japan, the European Central Bank, the Bank of England and the Swiss National Bank.
These facilities are often viewed as elite partnerships within global finance because they provide reliable access to dollar funding during periods of market stress.
The UAE request raises new questions
The debate intensified after the United Arab Emirates revealed it was discussing a potential swap agreement with the United States.
Treasury Secretary Scott Bessent also suggested earlier this year that Washington was reviewing requests from several countries in Asia and the Middle East.
UAE Trade Minister Thani Al Zeyoudi openly acknowledged that his country is seeking access comparable to the permanent arrangements enjoyed by America’s closest financial partners.
Economists at Peterson Institute questioned the economic justification for such a move, noting that the UAE is a wealthy nation that has not experienced a shortage of dollar liquidity.
Their concern is less about any individual country and more about the precedent it could establish.
If access to Federal Reserve support becomes associated with political relationships rather than financial stability, governments may begin to doubt whether the dollar remains a neutral reserve asset.
That risk comes at a delicate moment for the central bank itself. Questions over Federal Reserve independence have intensified under new Fed Chair Kevin Warsh, a Trump appointee, who has indicated the institution could work more closely with the administration on broader international economic matters while preserving independence over interest rate decisions.
Why reserve currency status is harder to protect than to build
The Peterson report highlights a broader issue that extends beyond any single administration.
Reserve currency status depends heavily on trust. Governments, sovereign wealth funds and multinational corporations hold dollars because they believe access to them will remain reliable regardless of political changes.
According to data from the International Monetary Fund, roughly 58% of global foreign exchange reserves remain denominated in US dollars, although that share has gradually declined over the past two decades. Rivals such as the euro and China’s renminbi have struggled to fully challenge the dollar, largely because the US offers unparalleled liquidity and institutional stability.
If countries begin to perceive that dollar access is contingent on diplomatic alignment, that advantage could slowly erode.
History suggests such shifts happen gradually rather than suddenly. Confidence in reserve currencies is built over decades but can weaken through a series of small policy decisions that collectively alter perceptions.
Markets will watch where the Fed draws the line
The key question now is whether the Federal Reserve will preserve a strict separation between monetary policy and geopolitical strategy.
Economists argue that politically motivated swap arrangements should remain the responsibility of the Treasury Department’s limited resources rather than the Fed’s balance sheet.
Investors and policymakers will be watching closely to see whether additional countries receive preferential access in the coming months.
The outcome may influence more than diplomatic relationships. It could shape how foreign governments view America’s long-term commitment to maintaining a predictable and independent financial system, a cornerstone of the dollar’s global dominance for nearly eight decades.
